We spend a lot of time on our site helping and talking to many retirees, semi-retirees and Canadians preparing for their financial independence dreams. On that note, as the end of another calendar year approaches and with a new year ready to begin soon we thought we’d share a few of our top tax tips for retirees.
Read on for the goods!
Top Tax Tips for Retirees
Beyond talking about the weather, or inflation; beyond discussing Tim Hortons coffee or hockey – Canadians love to talk taxes.
What’s more, Canadian retirees or soon-to-be retirees love to avoid taxes!
We hope to avoid taxation in our retirement as well.
In Beat the Bank by author and former banker Larry Bates, (you can read more here from My Own Advisor’s interview with Larry), Larry highlighted some wealth-builders and wealth-killers:
- Your savings rate and investing/contribution amounts.
- Time invested.
- Rate of return.
You and I have some direct control over a few of these wealth-builders. Essentially, the more money invested, the more time it remains invested, and the higher rate of return for your investments – the larger your retirement nest egg should be.
And for the record, dividends – don’t you know – are a HUGE part of stock market returns.
Dividend-paying companies tend to represent a significant portion of the Canadian equity market and are typically well-established, soundly managed companies with stable business models.
So, dividends can provide Canadian retirees with both income today AND remain an important part of a portfolio’s total return, helping to offset losses in times of market declines, while boosting portfolio returns when markets are rising.
This means as part of wealth-building you must at least consider the compounding power that reinvesting dividends delivered from dividend paying stocks can deliver.
Further Reading is here: How to Automatically Reinvest Dividends.
Larry went on to write about retirement wealth-killers:
- Money management fees
Any one or more of these things are wealth destroyers.
You already know from reading our site that money management fees are forever – meaning the money you pay in fees to manage your investment portfolio is money you will never see again – so choose wisely when you consider how and by whom your money is managed.
If you haven’t already done so, consider building some or all of your portfolio with some low-cost Exchange Traded Funds (ETFs).
When it comes to minimizing taxation, we believe you should consider investing in the following order in your asset accumulation years, generally speaking:
- RESPs – if you have kids (including taking advantage of the government grant)
- Taxable accounts.
When it comes to minimizing taxation in your asset decumulation years, a long list of considerations comes to mind.
Here are our top tax tips for retirees, to help avoid and/or minimize the impact of wealth killers in retirement.
Top Tax Tips for Retirees – Asset decumulation
1. Keep assets in the right location
Generally, there are four types of investment income and each source is taxed differently:
- Canadian dividends
- Capital gains
- Foreign income
- Interest income.
Canadian dividends and capital gains are taxed more favourably. Canadian dividend income receives the dividend tax credit. At the tme of this post, only half of capital gains are subject to income tax. Interest income and foreign income, on the other hand, do not benefit from any preferential tax treatment and are fully taxable.
So, in keeping the tax treatment of these four types of investment income in mind, we believe if you are going to invest in a taxable account then consider investing for Canadian dividends and/or for capital gains.
This means in retirement, consider owning any Canadian equity holdings in your taxable account. On the flip side, you can then own other assets that earn interest income or foreign income in tax-sheltered accounts like your RRSP/RRIF or LIRA/LIF.
- Here is everything you need to know about the RRSP.
- What is a RRIF and how does a RRIF work?
- Learn more about LIRAs and LIFs in this comprehensive post for retirees.
Being tax efficient with your asset location not only has the potential of significantly reducing your annual tax liability but it can also deliver a healthy tax-efficient income stream throughout retirement.
We’ve seen this direction taken with many of our clients, and they are wealthier for it.
2. Get the tax credits available to you
Tax credits, without too much more mention, are natually helpful in reducing tax liabilities.
As 2022 ends and 2023 approaches, consider some of these common tax credits that might apply to you:
- Pension income splitting – As a pensioner, you may be eligible to split up to 50% of your eligible pension income with your spouse or common-law partner to reduce the amount of income tax you may have to pay, if your spouse or common-law partner is in a lower tax bracket.
- RRSP deduction – Deductible RRSP contributions can reduce your taxes owing. You can contribute to an RRSP up until the end of the year you turn 71. You can also contribute to your spouse’s or common-law partner’s RRSP until the end of the year they turn 71.
- Medical expenses – You may be able to claim eligible medical expenses you or your spouse or common-law partner paid in any 12-month period.
- Age amount – If you were 65 years of age or older, and your net income is below a specific threshold, you can claim up to thousands on your tax return.
- Disability tax credit – If you have a severe and prolonged impairment in physical or mental functions, you may be eligible for the disability tax credit (DTC). If your spouse or common-law partner or your dependant has a severe and prolonged impairment in physical or mental functions, are able to claim the DTC, and they don’t need to claim all or part of the amount, they may be able to transfer the amount to you.
- Pension income amount – You may be able to claim up to $2,000 if you reported eligible pension, superannuation, or annuity payments on your return.
- Guaranteed income supplement (GIS) – The Guaranteed income supplement (GIS) provides a monthly non-taxable benefit to Old Age Security (OAS) pension recipients who have a low income and are living in Canada.
Check out how you can retire on a lower income with GIS here.
3. Split your pension income
Splitting pension income between spouses in retirement is another common way to reduce your household’s tax liability. With pension splitting, the higher-income spouse may transfer up to 50 per cent of their eligible pension income to the lower-income spouse. This reduces the household tax bill because the transferred income will be taxed at a lower rate in the lower-income spouse’s hands.
In fact, each individual can claim this amount for a total of $4,000 per year. The eligible pension depends on the type of income and/or the age of the pensioner. For example, Registered Pension Plan payments are considered ‘qualifying pension income’, regardless of the recipient’s age.
Both spouses must opt for pension income splitting on their tax forms. If both spouses have eligible pension income, only one can allocate funds to a spouse or partner in each tax year. Both must file a tax return that includes the elected split-pension amount.
What payments are eligible for pension splitting?
For those under age 65, the most common form of eligible income is from a registered company pension plan, whether defined benefit or defined contribution. Individuals who are age 55+ can split pension income with their spouses.
Individuals without a registered pension plan can also take advantage of this tax strategy by converting their Registered Retirement Savings Plans (RRSPs) or deferred profit-sharing plans into income through a life annuity or a Registered Retirement Income Fund (RRIF). It’s important to note, however, that this income doesn’t qualify for splitting until after age 65.
If you are 65 years or older, eligible income includes:
- Registered Retirement Savings Plan (RRSP),
- Registered Retirement Income Fund (RRIF) or
- Deferred Profit Sharing Plan (DPSP).
What payments are not eligible for pension splitting?
- Canada Pension Plan (CPP) payments
- Québec Pension Plan (QPP) payments
- Old Age Security payments
- Earnings from a United States individual retirement account (IRA).
In terms of government pension sources, the Canada Pension Plan (CPP)/Quebec Pension Plan (QPP) isn’t considered eligible income, although CPP/QPP benefits can be split based on a separate set of “sharing” rules.
What are the benefits of pension splitting/income sharing?
- It reduces the taxpayers’ marginal tax rate. By transferring income, you decrease your net income and increase the income of a spouse/partner that has a lower income.
- It reduces the OAS clawback.
Sharing CPP or QPP is available to spouses receiving these pensions but it’s important to note that CPP sharing is not the same as pension income splitting. The complete list of eligible pension income sources can be found on the Government of Canada website with a quick Google search.
4. Convert your RRSP to an RRIF before age 71
We have many clients in their 50s and 60s considering making withdrawals from their RRSP(s) before they turn age 71. We believe that can be very smart to “smooth out taxes”.
As someone approaching retirement or even considering retirement in your 60s, you should know that RRSPs must be closed/collapsed in the year an individual turns 71. It does not mean however you need to take RRIF income in that year.
To be tax-smart, avoid making major RRSP withdrawals in any given year or worse still, unless the RRSP value is very low, deregistering the entire RRSP amount in one year.
Instead, convert your RRSP to a RRIF and start taking your annual RRIF payments in the year you turn age 72, or ideally, for some, well before.
What we see often at Cashflows & Portfolios (when we do retirement income projections; in a low-cost way for Canadians), is the opportunity to convert RRSP assets to a RRIF income stream to help “smooth out taxes” for a few decades.
RRIF payments can be taxed annually at a lower marginal rate, so, the tax liability that is your RRSP nest egg is essentially spread out over time, avoiding major tax hits in any given year. This means, you should consider avoiding some conventional financial wisdom: always waiting until age 71 to convert your RRSP to a a RRIF.
If fact, based on pension income splitting information we shared above, if Canadians are age 65 or older and not receiving other pension income such as a workplace pension, then converting a portion, or all, of the RRSP to a RRIF early will allow retirees to take advantage of pension income splitting and withdraw money tax-free up to $2,000 per year.
For any diligent investor, with a large RRSP balance, mandatory age-related RRIF withdrawals can translate into larger taxable withdrawals and therefore increase taxation in your 70s and 80s when you least want that burden.
5. Consider your retirement income drawdown order carefully
Beyond the free posts, giveaways, and other free content on our site, we are happy to offer retirement projections for any Canadian at a low-cost. We’ll link to those services again later, below.
Aligned to #1 and keeping your assets in the right location, is the tax-savvy opportunity to draw down your assets in the right order to reduce taxation.
In a non-registered investment account, the great news is Canadian dividends, capital gains (and any return of capital) are taxed lower than interest income. However, this also means depending on any pension income, RRSP/RRIF assets, TFSA assets and other income streams in retirement, depleting the taxable account early in retirement could be the best account to draw down first (although not always)!
In order to maximize deferring taxes in retirement, a rule of thumb we help clients out with is withdrawals from the least tax-efficient accounts to the most tax-efficient sources – a “withdrawal order” if you will.
Here are some examples from least efficient to most efficient, depending on the clients’ assets and income sources:
- Investment income earned from investment holding companies, then
- Higher-income spouse/partner’s non-registered account, then
- Lower-income non-registered account, then
- LIFs, then
- RRSP/RRIFs, then
- TFSAs “near the end” for any estate planning or wealth transfer.
This withdrawal order is hardly a recipe but it does sometimes make sense to slowly withdraw from your taxable account(s) and/or RRSPs/RRIFs, early in retirement, to help “smooth out taxes” over a few decades as we have highlighted above. The actual withdrawal order recipe would depend on your specific situation.
6. Make RRSP/RRIF withdrawals over time to fill up the TFSA!
The Tax-Free Savings Account (TFSA) contribution limit will increase to $6,500 (from $6,000) for 2023.
This new limit means that a taxpayer who has never contributed to a TFSA and has been eligible for one since its inception will have a cumulative contribution room of $88,000.
That’s a lot of tax-free compounding power.
Even if some retirees don’t need the money for spending, we see/discuss with some retirees an option to make some slow, methodical RRSP withdrawals in their 50s and 60s (i.e., to “smooth out taxes”) and move that money into their TFSAs to supercharge more wealth-building power.
Unfortunately, there’s no way to transfer money from an RRSP to a TFSA directly, without penalty.
So, consider this before you make this move:
1. Remember you’ll pay withholding taxes on the RRSP withdrawal. When you withdraw money from an RRSP, you must include that amount in your income for the year and pay taxes on it. For example, if you withdraw $10,000 from an RRSP and earn $15,000 from a part-time job/hobby, your total income for the year will be $25,000. As a result, you’ll need to pay ~30% of the $10,000 withdrawn from the RRSP in withholding taxes. The remainder can go into your TFSA.
When you withdraw money from your RRSP, the institution that manages your account will keep a portion of the withdrawal for taxes. Essentially, it’s our Canada Revenue Agency (CRA) getting their money back sooner than later. Depending on the amount you withdraw from your RRSP, you will have *withholding taxes:
- $5,000 or less, they’ll withhold 10%
- $5,001 to $15,000, they’ll withhold 20%
- More than $15,000, they’ll withhold 30%
Here is our Government of Canada source on that.
The amount withheld may not be the amount you owe when you file your taxes. It’s important to set aside some of the money for taxes in the future if you have a high income. (*Withholding rates are slightly different in Quebec.)
2. Remember that you can’t redeposit money back to the RRSP in the future
With your TFSA, any withdrawal you make can be deposited back into the TFSA in a future year. However, with an RRSP, if you withdraw money you’re not able to redeposit that money in the future.
How to move money from your RRSP to TFSA?
Easy but with some caution.
1. Request a withdrawal from your RRSP
You’ll need to have cash in your account to request a withdrawal. As a result, you may need to sell some of your investments ahead of time. You may be able to remain invested as you move money from your RRSP to your TFSA, however the process is more complicated and involves a non-registered account. We recommend you contact your RRSP provider to discuss your options before proceeding…
2. Pay your RRSP withholding taxes and potentially a small fee.
As mentioned above, when you withdraw investments from your RRSP – withholding tax will apply. Your financial institution may also levy a charge called a “deregistration fee”, which could cost you $25 or $50 each time you move money out of your RRSP that is not coverted to a RRIF first.
3. Place investments in a non-registered account and/or transfer the shares from your non-registered account to your TFSA.
If you hold a stock or ETF units in your RRSP and you want to hold those in your TFSA instead, there is no way to simply transfer it from one account to the other – at least we don’t know of any brokerage that does this directly yet but let us know!
When it comes to cash, there is no direct way to transfer cash money in a Registered Retirement Savings Plan (RRSP) to a Tax-Free Savings Account (TFSA). In order to contribute funds to a TFSA from an RRSP, you must withdraw the funds, and pay any applicable withholding tax, plus any additional taxes at tax time. You must also have the available contribution room in your TFSA.
With assets from the RRSP to TFSA, essentially there is a “deregistration” of shares or units from your RRSP, that means you’ll be transferring them from the RRSP to a non-registered (taxable) account)), then once the shares or ETF units are in a non-registered account, you could then transfer them to your TFSA at your discretion. (Note that if assets appreciate slightly during the time it takes you to arrange all of this, you will pay tax again on any capital gain. If the shares fall in value, however, you will not be able to deduct any capital losses.)
Here is a source as per RBC:
“Can I transfer assets in-kind to a TFSA from an RRSP without tax implications?”
“No. A TFSA and an RRSP differ in structure and you cannot transfer between them. If you wish to use assets (either cash or securities) from your RRSP to contribute to your TFSA, you must first withdraw the RRSP assets (subject to applicable withholding taxes), move the assets to a non-registered account, and then contribute to the TFSA. Speak to your tax advisor to make sure this is right for you.”
With such considerations in mind, we believe for many retirees should consider taking lump sums of cash out of the RRSP, using/spending what they need, then depositing that cash when new TFSA contribution room comes up each year. This will not trigger any additional tax consequences and of course, all growth moving forward inside the TFSA is tax-free.
When it comes to RRSP withdrawals, the idea is to “smooth out taxation” over time and avoid any lumpy tax hits in retirement when you can least afford major tax impacts with your portfolio.
Top Tax Tips for Retirees Summary
Beyond our list, there is of course spousal RRSPs (to split income between spouses during retirement) and also spousal loans to consider, but those are more nuanced subjects to discuss in detail for another day.
We believe if you can consider the following top tax tips for your retirement, you’ll be way ahead of most:
- Keep assets in the right location.
- Claim the tax credits available to you.
- Split your pension income.
- Convert your RRSP to a RRIF before age 71 (at least a portion).
- Consider your retirement income drawdown order carefully.
- Consider “smoothing out taxes” and moving RRSP/RRIF assets to your TFSA if you can.
Need help with your retirement income projections and mastering income planning?
Everyone has different retirement income needs and wants. We know. We’re working through our own semi-retirement income solutions right now!
Personal finance is always personal.
So, depending on your assets (such as RRSP/RRIF assets, a workplace pension, government benefits, TFSAs, LIRA/LIFs, and more), including rental incomes and/or corporations to consider, your retirement drawdown puzzle could be very complex.
Your options and combinations may seem endless:
- What registered accounts do I draw down first?
- How much income will my investments generate?
- Do I have any idea how long this income might last?
- When should I take my workplace pension?
- Is it more beneficial to draw down non-registered money before RRSPs and TFSAs?
- Can I avoid OAS clawbacks?
- And much, much more…
If you are interested in obtaining private retirement projections for your financial scenario, please contact us here to get started.
Stay tuned for more, great, FREE content on our site. We’re happy to help.
Mark and Joe.
24 thoughts on “Top Tax Tips for Retirees”
Thanks for your article on tax tips for retirement. I’m wondering about order of withdrawing assets. If I am receiving a defined benefit pension doesn’t it make sense to withdraw RRSP assets earlier than taxable assets and delay CPP/OAS until those RRSP funds are substantially drawn down? The RRSP assets will be fully taxed whether or not the growth is from dividends/capital gains. Even if I don’t need the money, if I withdraw RRSP funds when in a lower tax bracket and reinvest in a taxable account, my tax liability will be less, correct? I know of some cases where RRSP/RRIF assets were held as long as possible because of the “tax deferral” which resulted in a huge tax liability upon their death when the RRIF assets became taxable all at once.
It really depends David. It can depend when you want to spend the money, if you want to leave an estate, what tax rate you’re comfortable in/with and more.
Most often with clients, we see the desire and need to “smooth out taxes” so a slow, systematic withdrawal of RRSP/RRIF assets is helpful in the 60s and 70s while pension income is flowing in. Doesn’t have to be that way of course.
If you don’t need the money, then certainly, move money out of the RRSP in your lowest tax-years and funnel that money to your non-reg. account or TFSA. That seems to be best. This makes a good withdrawal order “NRT” or “RNT“:
1. Non-registered (N) and/or RRSP (R) to depleted before,
2. TFSAs (T).
That’s exactly what I started doing at age 59 (I’m 62). I put my 500K RRSP into a RRIF and I transfer the minimum annual withdrawal amount to my non-reg account and my TFSA. I currently receive 80K in DB pensions and want to minimize tax when I start collecting CPP and OAS at age 70. OAS will be clawed back, but I want to minimize that. Ironically, my RRIF balance at the end of each year is higher than the year before, even with the minimum withdrawal. So the RRIF depletion goal before age 70 isn’t working out too well!
Sounds like a great plan, Colin! “Smooth out taxes” for you over decades while living your income dreams 🙂
BTW Colin, we just talked to a client recently who wondered about RRIF depletion before age 80. Not advice of course for them but we said “go for it” as they wish given they have a healthy pension as well. Very smart to enjoy money today and to avoid lumpy taxation issues later in life when we think most 80 or 90-somethings don’t want to give much of their life savings back to the government! (We don’t think!)
In my network of retired teachers, who have one of the best DB pensions, I think your general approach is reasonable for most of them.
Remember many DB pensions drop a bridge benefit at age 65. This either suggests an opportunity to take OAS, rather than delaying it (but I’m an advocate of deferring CPP) or planning an RSP withdrawal rate that accommodates the drop of the bridge benefit and deferring OAS as well.
Much will depend on what your desired income is and how much you have saved in your RSP.
Well added! We believe with any bridge benefit drops, it makes sense to take OAS at the standard age of 65 and defer CPP to age 70 if possible for the 42% income boost. Of course, everything depends on when folks really need or want the money. It’s not always a math decision!
All our best James,
The calculations depend on one’s expected lifespan, too. How long have I got from retirement till my whole RRIF becomes fully taxable as income at my death?
While I’m alive and well, I can let my assets continue to grow inside my RRIF, tax free, taking out the minimum every year (and splitting it with my spouse for tax purposes.) In my case I am earning from dividends more than the minimum withdrawals and will do so for a couple more years.
However, when I die, all that gets taxed at full marginal rates. If I took more of it out and invested it in my non-registered accounts (having maxed my TFSA every year from the returns on my non-registered accounts), at least the growth from the time of taking it from the RRIF is taxed at lower overall rates, because the growth is either dividends (assume from Canadian sources) or capital gains.
So: grow without tax in RRIF, but don’t die too soon, or pay tax in taking it out of RRIF but have it grow with less exposure to taxes from then on?
One does not always control the ‘don’t die too soon’ factor, of course. So maybe one should get started in depleting the RRIF, at a tax hit that one can afford from year to year. Never a pleasure to pay the tax, but never pay tax on anything is not an option. This probably keeps the rate as low as it can be.
Not quite an estate freeze, but a variant of it, I suppose.
Does that sound right?
P.S. This all depends on one’s caring what happens to one’s assets after death. If I just want to keep MY taxes at a minimum, I should leave the most I can in my RRIF, taking out only the minimum. Once I’m dead, the taxes on the whole amount will not bother me.
Everyone’s situation is different for sure John.
We see big advantages of drawing down RRSP/RRIF while you’re alive and deferring capital gains, etc. until the end. That model doesn’t work for everyone but the ability to “smooth out taxes” over many decades and income split if you have a partner is usually ideal.
It is my hope (Mark) and likely Joe’s as well to largely “live off dividends” in the early part of semi-retirement, retirement as to aovid any sequence of return risk and allow the portfolio to compound away mostly tax-free (TFSA) and tax-deferred (RRSP/RRIF).
Always a bit of a puzzle for any investor!
Hello and thank you for this great article.
I just want to ask for clarification.
The two passages below are taken from the article:
1. “Registered Pension Plan payments are considered ‘qualifying pension income’, regardless of the recipient’s age.”
2. “Individuals who are age 55+ can split pension income with their spouses.”
I will be receiving a DB pension before age 55. Will I be able to income split with my spouse or not? Does one, both or neither of us have to be age 55 to income split DB pension income?
The article says that there is withholding tax on withdrawals from a RRIF. I believe the witholding tax is charged on withdrawals in excess of the annual minimum. You can take out the minimum with no tax hit at the time (though it will go into taxable income when one does one’s returns, subject to splitting with a spouse).
John – I didn’t see any reference in the article to withholding taxes on “RRIF” withdrawals – it was only referring to withholding taxes with RRSPs. Did I miss something?
sorry, it was about RRSPs – but the rates of withholding are the same as for a RRIF, once one has taken out the minimum for the year. So I got confused. I guess there is no amount one is allowed to take out of an RRSP without tax at the front end – I have never tried.
The title of the section about withdrawals mentions RRIFs and RSPs, but then the discussion is about RSPs only. For those thinking of drawing down a RRIF for more than the minimum, the w/holding tax is worth mentioning in that context.
All good, John!
We can certainly work on the context for that section of the article in the future – we don’t want to confuse anyone and pride ourselves on trying to be very clear! 🙂
There is withholding tax on RRSP withdrawals but not RRIF, unless you go above the RRIF min. Correct. Can you highlight where that error might be John G. since we want to correct it for sure 🙂
Great article! I wanted to bring up a point regarding in-kind transfers from an RRSP to a TFSA. When will our government finally allow a direct transfer? Some may argue that they don’t want you to get benefit on both ends (tax credit/deferral at start and tax-free growth later). However, doesn’t the new first-time home buyer account give you benefits on both ends? Just trying to see if this is something you feel would ever change?
I always get BMO Investorline to do in-kind transfers from my RRIF to my TFSA. Should be the same for RRSP. I do it as part of my minimum withdrawal, so there’s no withholding tax. The shares are transferred in-kind. The transfer is valued using the share price on the day of the transfer for the purposes of issuing the tax receipt for the withdrawal amount equivalent and the value of the deposit to the TFSA. If you transfer from your RRSP, just have enough cash in the account to pay for the withholding tax.
Much appreciated for your experience, Colin. Yes, you can do in-kind from RRIF to TFSA transfers but technically the assets are just deemed at market value to your point, and moved.
Updated: RRSP to TFSA is more a multi-step dance as we understand it, and you still need to pay/cover RRSP withholding taxes as you have mentioned so very wise to keep cash savings for that.
We appreciate your sharing!
We also updated the post wording a bit to clarify we meant there is no easy way to do any RRSP to TFSA direct funds transfers, that we know of.
Updated: Here is our source:
Given a TFSA and an RRSP differ in structure and you cannot transfer between them. If you wish to use assets (either cash or securities) from your RRSP to contribute to your TFSA, you must first withdraw the RRSP assets (subject to applicable withholding taxes), move the assets to a non-registered account, and then contribute to the TFSA. Speak to your tax advisor to make sure this is right for you.
Appreciated that reply since that might not have been clear in the post.
Thanks Colin – I was hoping to be able to do it without tax implications (ie. flow tax-free) but I guess that can’t happen. One can only hope. 😉
If we find some news or a way, that we don’t know of, we’ll share it or fact-check it!
I think that’s a tricky one Mikey since you have to pay tax on the RRSP withdrawals including withholding tax and the government wants to be assured they get their money back sooner than later. I would like RRSP withholding at least to disppear and then be reconciled at tax time like the RRIF does. That would be better…
This is just a test to see if the post gets through.